6 ms·

Guiding a Venture-Backed Startup to a Felony

86 points by sigacts 10y ago

jessaustin 10y ago
Calling this a "venture-backed startup" is a stretch. It was really just a con. One couldn't reasonably expect a single author who wrote five westerns all by herself to net $250k for her efforts. They didn't really expect to be able to pay back the investor after buying all those goodies for themselves, even if they could have gotten a single book written.
- sigacts 10y ago
  I agree with your assessment. What is intetesting is that this group structured the deal like a venture-backed company. The LLC documents looked like many other versions I have seen. The Scoundrel folks thought that this formation scheme gave them immunity from accountability.
  - will_brown 10y ago
    I see it quite regularly where laymen create an LLC, find themselves personally liable for company actions/debts and then can not wrap their mind around how they could be liable for an entity that is literally called a limited liability company. It actually reminds me of the people who take the opinion that in the magical world of the DAO no one can be liable for anything because by definition if an action occurred, then it is legal because it was contractually agreed to. It's an important lesson to learn that corporate veils can be pierced and contracts can be voided (i.e. unfair; deceptive; fraud in the inducment; illegal; etc...).
    - tamana 10y ago
      The word "limited liability" refers to the fact that the owners are liability only for an amount up to their investment, within the scope of the corporation. The limit refers to the investment, not the fact that criminal activity is still legal exposure. Obviously an owner cannot sign away liability for individual criminal activity, same as with any corporation.
      - will_brown 10y ago
        And while you have stated the rule, what people don't understand is the exceptions in which members/owners of LLCs can in fact be personally liable above and beyond their investment in the entity.
- 35bge57dtjku 10y ago
  I'd think a web portal that fits the bill could be constructed for about 10k, maybe 20k. So I wonder if the rest could have actually paid for the 5 novels. > One couldn't reasonably expect a single author who wrote five westerns all by herself to net $250k for her efforts. Why not, that's too low for any author? I would have thought they could find someone somewhere who'd agree to make 5 mediocre, somewhat short novels for 150k total, maybe someone just starting out. Wouldn't that have at least been a real effort and protected them from being charged with fraud? That'd leave them with 80k in profit. They'd still have to get around the part where they agree money won't be used for their salaries, but they'd at least have fulfilled the letter of the agreement. And 80k for a few weeks of work is pretty good, imo.
  - DanBC 10y ago
    > Why not, that's too low for any author? It feels like a bit of a gamble to write a series of books and throw a huge marketing budget at them. That's what publishers have been doing, and it doesn't work for most of their books. Average earnings for published authors in UK is £11k pa. https://www.theguardian.com/books/2015/apr/20/earnings-authors-below-minimum-wage https://www.theguardian.com/books/2015/apr/20/earnings-autho... > The top 10% of professional authors, those who make £60,000 or more a year from their writing, earned 58% of all the money made by professional authors in 2013, and the top 5%, those making more than £100,000, earned 42.3% of that money. The top 1%, who make mean average earnings of more than £450,000, take 22.7% of all earnings, said the Authors’ Licensing & Collecting Society, which commissioned the UK-based survey. > The picture for lower-earning writers was much bleaker. The bottom 50% of authors were those who earned less than £10,500 in 2013, and accounted for just 7% of the amount earned by all writers put together. And 17% of all writers did not earn anything at all during 2013, said the ALCS, adding that 98% of those authors had published a work every year from 2010 to 2013. I dunno, does this make it sound like the scam / system described in the submission is worth a punt?
    - 35bge57dtjku 10y ago
      > It feels like a bit of a gamble to write a series of books and throw a huge marketing budget at them. How much money would they even have had to spend on marketing the books, given they would have their own web portal? > I dunno, does this make it sound like the scam / system described in the submission is worth a punt? Maybe not if you're trying to make a successful business. But if you're trying to do the bare minimum to quickly score about 80k usd while still protecting yourself from fraud/felony charges, wouldn't this be good news? It sounds like you could easily find an author who'd be happy with 10k or even 15k per year.
- fencepost 10y ago
  The description of what they were proposing sounds like a whole stream of shlock Westerns from the late 80s - the Western equivalent of Harlequin romances, complete with series numbers that reached into triple digits. You used to see whole shelves of these in used book stores. Took a bit of searching, but stuff like the Trailsman and Longarm series, some of which may still be alive - and with close to 400 books in the series. I have to agree with jessaustin - this was a con. The fact that they were able to leverage a securities connection into felony charges does not make it venture capital. Edit: see http://www.readersadvice.com/readadv/000214.html http://www.readersadvice.com/readadv/000214.html for a list of some series and books in them.
- chris11 10y ago
  Their plan seemed really unfocused too. They wanted to create a major website just to run ads on it. I agree, this just looks like a con.
  - chiph 10y ago
    Well, it worked for the "Million Dollar Homepage" guy. But yeah, I smell scam.
- michaelbuckbee 10y ago
  The one interesting aspect of this that jumped out of me was product placement within the novels. Has this ever actually happened? It's ubiquitous in TV and movies, but novels?
- ufmace 10y ago
  Exactly what I thought. It doesn't look like they made even a minimal effort to actually create what they told the investor they were going to create. Sounds more like they slapped together a plausible-sounding story to con some guy out of a pile of cash, and tried to use standard startup investment stuff to shield themselves from liability for running a con. Which also means that trying to take lessons from them seems kinda silly. If you're not trying to run a con, you don't need a web list to tell you how to not look like you're running a con. The only one to take lessons from here is the investor. If you're new to investing, don't invest money in a random startup run by strangers based on a slick pitch. Do hire some people who know what they're talking about to do some due diligence. If you're putting a quarter mil at risk, it's worth at least spending a few grand to make sure they're legit.
api 10y ago
The international bureau of you can't make this stuff up delivers yet again.
dmix 10y ago
> Share a Worst Case Scenario - The prospectus for the Scoundrel deal showed a conservative, most likely and optimistic scenario. The conservative scenario showed that Mr. Brandenburg would receive all of his investment back in just two years. In fact, Mr. Brandenburg never saw any dividend or repayment on his $250,000 investment. Don’t gloss over risks. This is an interesting piece of advice. I never thought to plan the negative scenarios when doing high-level planning. You always discuss possible risks and keep them at the back of your mind but adding a failure scenario to your plans among low, medium, high outcome scenarios is a really good idea. You don't hear much about risk management/planning for startups. If you're not monitoring your risks along with your positive KPI's (or factoring them in your KPI analysis) it's easy to gloss over them or delude yourself that they don't exist. Although, otherwise I question the value of taking much lessons out of this 'startup' failure. It's not very analogous to anything like the standard HN web startup. Just some outsider non-techies who wanted to make a 'web portal' and wasted a bunch of money frivolously (ie: 100k went to the author for licensing upfront). Even ignoring their lack of technical industry experience, their business plan heavily centered around building a community with a target market they didn't already have any traction or influence in - which is always the hardest part in any community-centric product. The tech is (usually) the easy part.
- cookiecaper 10y ago
  The truth is that if you present a document to your investors that says "Worst Case Scenario: Total Loss", it's not going to go well. Your investors will likely believe that you're presenting that as a minimum acceptable outcome. It may make a jury feel you were trying to be honest, but you probably won't get any investment to start with if you take that approach.
  - morgante 10y ago
    Eh? Almost any sane investment prospectus out there will state that it is possible for your investment to lose money and, in the worst case, to be lost entirely. Any prospectus which doesn't say that is almost ipso fact a fraud.
wtvanhest 10y ago
IMNAL but... > Keep personal expenses out of your company books. Is likely the most important advice in this piece. If you only take the compensation you agree with your investors/board to take, and you never pass unrelated expenses back to your entity, you will at least appear to be acting morally. The second you start commingling funds, is the second you enter a period of extreme risk. Never commingle investor funds with personal funds and avoid spending on things that you 'justify' as a business expense if they benefit you personally in anyway. I have a feeling we are about to read about more cases like this one. America is in full startup fever right now and people will act immorally when they realize that success is out of their grasp.
Pitarou 10y ago
If you need these six "lessons for entrepreneurs" explaining to you, you're not fit to take investors' money. Period. It's a story of ignorance, incompetence and irresponsibility from start to finish.
- cookiecaper 10y ago
  I think the article's points are expected to be received more as reminders to keep your nose clean than actually communicating new information to readers.
Waterluvian 10y ago
What kind of punishment could be handed out for this?
- greenyoda 10y ago
  The article mentions that the defendant was convicted of securities fraud, a "Class Three Felony" in Colorado. According to this web site[1]: "Class three felonies, such as vehicular homicide while under the influence, are punishable by four to 12 years behind bars and five years of parole." [1] http://www.mbslawco.com/blogs/2015/october/understanding-manslaughter-laws.aspx http://www.mbslawco.com/blogs/2015/october/understanding-man...
  - sigacts 10y ago
    Yep. We talked to the judge after the case and he said that the punishment could range from probation to 12 years in state prison. The defendant has no criminal history, so I would imagine the sentence will be relatively light.
    - sovietmudkipz 10y ago
      With a felony on your record, no sentence is a light sentence. He'll be haunted by his conviction until he dies, can get records sealed (depending on his state), or receives a presidential pardon.
jondubois 10y ago
The only thing I learned from this article is that even the most idiotic ideas can appeal to some investors if you search hard enough.
- Kequc 10y ago
  In my experience securing investment is like pulling teeth. The amount of assurances and background checks involved alone, is enough to make one's head spin and that doesn't nearly get you to the end of it. How was an outcome of "we burned all of the money and didn't deliver a single thing" not in the final draft of at least three different contracts? I spent a year searching for venture funding and it was painful. There was no oversight, or staggered milestone based deliveries? Someone just handed over $250,000? In my dreams.
- deleted 10y ago
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deleted 10y ago
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nstj 10y ago
Without being sarcastic, I think the best part of this article was discovering that Tom Selleck starred in a 1990 Western set in Australia called "Quigley Down Under"[0]. And I tend to agree with the general sentiment of other comments here, it seems that given there seemingly was no real intent to create a real company from the funds invested, the title of the article could just as easily be "How Not to Run a Fake Startup Investment Scam". [0]: https://en.m.wikipedia.org/wiki/Quigley_Down_Under https://en.m.wikipedia.org/wiki/Quigley_Down_Under
- sigacts 10y ago
  The craziness is that these guys really thought they were building a company.
- tootie 10y ago
  It was a major Hollywood production with a ton of marketing behind it. I remember seeing commercials for it. I think I rented it on VHS. It wasn't great.
  - mcguire 10y ago
    Eh, it had its moments, Roy.
gerby 10y ago
How did they expect to build the web portal, if no one on the operating team had any knowledge of how to do so?
realworldview 10y ago
If it sounds too good to be true, it is too good to be true. There is no magic. Where there is money, there is deceit and opportunistic theft. Don't believe anyone who tells you they will do a job without staging and proof. Unless you bought those venture-backed rose-tinted glasses for those passionate about whatever the next fad is. Open your eyes, people... Oh and this just reeks of con.

86 points by sigacts 10y ago

Calling this a "venture-backed startup" is a stretch. It was really just a con. One couldn't reasonably expect a single author who wrote five westerns all by herself to net $250k for her efforts. They didn't really expect to be able to pay back the investor after buying all those goodies for themselves, even if they could have gotten a single book written.

sigacts 10y ago
I agree with your assessment. What is intetesting is that this group structured the deal like a venture-backed company. The LLC documents looked like many other versions I have seen. The Scoundrel folks thought that this formation scheme gave them immunity from accountability.
- will_brown 10y ago
  I see it quite regularly where laymen create an LLC, find themselves personally liable for company actions/debts and then can not wrap their mind around how they could be liable for an entity that is literally called a limited liability company. It actually reminds me of the people who take the opinion that in the magical world of the DAO no one can be liable for anything because by definition if an action occurred, then it is legal because it was contractually agreed to. It's an important lesson to learn that corporate veils can be pierced and contracts can be voided (i.e. unfair; deceptive; fraud in the inducment; illegal; etc...).
  - tamana 10y ago
    The word "limited liability" refers to the fact that the owners are liability only for an amount up to their investment, within the scope of the corporation. The limit refers to the investment, not the fact that criminal activity is still legal exposure. Obviously an owner cannot sign away liability for individual criminal activity, same as with any corporation.
    - will_brown 10y ago
      And while you have stated the rule, what people don't understand is the exceptions in which members/owners of LLCs can in fact be personally liable above and beyond their investment in the entity.
35bge57dtjku 10y ago
I'd think a web portal that fits the bill could be constructed for about 10k, maybe 20k. So I wonder if the rest could have actually paid for the 5 novels. > One couldn't reasonably expect a single author who wrote five westerns all by herself to net $250k for her efforts. Why not, that's too low for any author? I would have thought they could find someone somewhere who'd agree to make 5 mediocre, somewhat short novels for 150k total, maybe someone just starting out. Wouldn't that have at least been a real effort and protected them from being charged with fraud? That'd leave them with 80k in profit. They'd still have to get around the part where they agree money won't be used for their salaries, but they'd at least have fulfilled the letter of the agreement. And 80k for a few weeks of work is pretty good, imo.
- DanBC 10y ago
  > Why not, that's too low for any author? It feels like a bit of a gamble to write a series of books and throw a huge marketing budget at them. That's what publishers have been doing, and it doesn't work for most of their books. Average earnings for published authors in UK is £11k pa. https://www.theguardian.com/books/2015/apr/20/earnings-authors-below-minimum-wage https://www.theguardian.com/books/2015/apr/20/earnings-autho... > The top 10% of professional authors, those who make £60,000 or more a year from their writing, earned 58% of all the money made by professional authors in 2013, and the top 5%, those making more than £100,000, earned 42.3% of that money. The top 1%, who make mean average earnings of more than £450,000, take 22.7% of all earnings, said the Authors’ Licensing & Collecting Society, which commissioned the UK-based survey. > The picture for lower-earning writers was much bleaker. The bottom 50% of authors were those who earned less than £10,500 in 2013, and accounted for just 7% of the amount earned by all writers put together. And 17% of all writers did not earn anything at all during 2013, said the ALCS, adding that 98% of those authors had published a work every year from 2010 to 2013. I dunno, does this make it sound like the scam / system described in the submission is worth a punt?
  - 35bge57dtjku 10y ago
    > It feels like a bit of a gamble to write a series of books and throw a huge marketing budget at them. How much money would they even have had to spend on marketing the books, given they would have their own web portal? > I dunno, does this make it sound like the scam / system described in the submission is worth a punt? Maybe not if you're trying to make a successful business. But if you're trying to do the bare minimum to quickly score about 80k usd while still protecting yourself from fraud/felony charges, wouldn't this be good news? It sounds like you could easily find an author who'd be happy with 10k or even 15k per year.
fencepost 10y ago
The description of what they were proposing sounds like a whole stream of shlock Westerns from the late 80s - the Western equivalent of Harlequin romances, complete with series numbers that reached into triple digits. You used to see whole shelves of these in used book stores. Took a bit of searching, but stuff like the Trailsman and Longarm series, some of which may still be alive - and with close to 400 books in the series. I have to agree with jessaustin - this was a con. The fact that they were able to leverage a securities connection into felony charges does not make it venture capital. Edit: see http://www.readersadvice.com/readadv/000214.html http://www.readersadvice.com/readadv/000214.html for a list of some series and books in them.
chris11 10y ago
Their plan seemed really unfocused too. They wanted to create a major website just to run ads on it. I agree, this just looks like a con.
- chiph 10y ago
  Well, it worked for the "Million Dollar Homepage" guy. But yeah, I smell scam.
michaelbuckbee 10y ago
The one interesting aspect of this that jumped out of me was product placement within the novels. Has this ever actually happened? It's ubiquitous in TV and movies, but novels?
ufmace 10y ago
Exactly what I thought. It doesn't look like they made even a minimal effort to actually create what they told the investor they were going to create. Sounds more like they slapped together a plausible-sounding story to con some guy out of a pile of cash, and tried to use standard startup investment stuff to shield themselves from liability for running a con. Which also means that trying to take lessons from them seems kinda silly. If you're not trying to run a con, you don't need a web list to tell you how to not look like you're running a con. The only one to take lessons from here is the investor. If you're new to investing, don't invest money in a random startup run by strangers based on a slick pitch. Do hire some people who know what they're talking about to do some due diligence. If you're putting a quarter mil at risk, it's worth at least spending a few grand to make sure they're legit.

api 10y ago

The international bureau of you can't make this stuff up delivers yet again.

dmix 10y ago

> Share a Worst Case Scenario - The prospectus for the Scoundrel deal showed a conservative, most likely and optimistic scenario. The conservative scenario showed that Mr. Brandenburg would receive all of his investment back in just two years. In fact, Mr. Brandenburg never saw any dividend or repayment on his $250,000 investment. Don’t gloss over risks. This is an interesting piece of advice. I never thought to plan the negative scenarios when doing high-level planning. You always discuss possible risks and keep them at the back of your mind but adding a failure scenario to your plans among low, medium, high outcome scenarios is a really good idea. You don't hear much about risk management/planning for startups. If you're not monitoring your risks along with your positive KPI's (or factoring them in your KPI analysis) it's easy to gloss over them or delude yourself that they don't exist. Although, otherwise I question the value of taking much lessons out of this 'startup' failure. It's not very analogous to anything like the standard HN web startup. Just some outsider non-techies who wanted to make a 'web portal' and wasted a bunch of money frivolously (ie: 100k went to the author for licensing upfront). Even ignoring their lack of technical industry experience, their business plan heavily centered around building a community with a target market they didn't already have any traction or influence in - which is always the hardest part in any community-centric product. The tech is (usually) the easy part.

cookiecaper 10y ago
The truth is that if you present a document to your investors that says "Worst Case Scenario: Total Loss", it's not going to go well. Your investors will likely believe that you're presenting that as a minimum acceptable outcome. It may make a jury feel you were trying to be honest, but you probably won't get any investment to start with if you take that approach.
- morgante 10y ago
  Eh? Almost any sane investment prospectus out there will state that it is possible for your investment to lose money and, in the worst case, to be lost entirely. Any prospectus which doesn't say that is almost ipso fact a fraud.

wtvanhest 10y ago

IMNAL but... > Keep personal expenses out of your company books. Is likely the most important advice in this piece. If you only take the compensation you agree with your investors/board to take, and you never pass unrelated expenses back to your entity, you will at least appear to be acting morally. The second you start commingling funds, is the second you enter a period of extreme risk. Never commingle investor funds with personal funds and avoid spending on things that you 'justify' as a business expense if they benefit you personally in anyway. I have a feeling we are about to read about more cases like this one. America is in full startup fever right now and people will act immorally when they realize that success is out of their grasp.

Pitarou 10y ago

If you need these six "lessons for entrepreneurs" explaining to you, you're not fit to take investors' money. Period. It's a story of ignorance, incompetence and irresponsibility from start to finish.

cookiecaper 10y ago
I think the article's points are expected to be received more as reminders to keep your nose clean than actually communicating new information to readers.

Waterluvian 10y ago

What kind of punishment could be handed out for this?

greenyoda 10y ago
The article mentions that the defendant was convicted of securities fraud, a "Class Three Felony" in Colorado. According to this web site[1]: "Class three felonies, such as vehicular homicide while under the influence, are punishable by four to 12 years behind bars and five years of parole." [1] http://www.mbslawco.com/blogs/2015/october/understanding-manslaughter-laws.aspx http://www.mbslawco.com/blogs/2015/october/understanding-man...
- sigacts 10y ago
  Yep. We talked to the judge after the case and he said that the punishment could range from probation to 12 years in state prison. The defendant has no criminal history, so I would imagine the sentence will be relatively light.
  - sovietmudkipz 10y ago
    With a felony on your record, no sentence is a light sentence. He'll be haunted by his conviction until he dies, can get records sealed (depending on his state), or receives a presidential pardon.

jondubois 10y ago

The only thing I learned from this article is that even the most idiotic ideas can appeal to some investors if you search hard enough.

Kequc 10y ago
In my experience securing investment is like pulling teeth. The amount of assurances and background checks involved alone, is enough to make one's head spin and that doesn't nearly get you to the end of it. How was an outcome of "we burned all of the money and didn't deliver a single thing" not in the final draft of at least three different contracts? I spent a year searching for venture funding and it was painful. There was no oversight, or staggered milestone based deliveries? Someone just handed over $250,000? In my dreams.
deleted 10y ago
[deleted]

deleted 10y ago

[deleted]

nstj 10y ago

Without being sarcastic, I think the best part of this article was discovering that Tom Selleck starred in a 1990 Western set in Australia called "Quigley Down Under"[0]. And I tend to agree with the general sentiment of other comments here, it seems that given there seemingly was no real intent to create a real company from the funds invested, the title of the article could just as easily be "How Not to Run a Fake Startup Investment Scam". [0]: https://en.m.wikipedia.org/wiki/Quigley_Down_Under https://en.m.wikipedia.org/wiki/Quigley_Down_Under

sigacts 10y ago
The craziness is that these guys really thought they were building a company.
tootie 10y ago
It was a major Hollywood production with a ton of marketing behind it. I remember seeing commercials for it. I think I rented it on VHS. It wasn't great.
- mcguire 10y ago
  Eh, it had its moments, Roy.

gerby 10y ago

How did they expect to build the web portal, if no one on the operating team had any knowledge of how to do so?

realworldview 10y ago

If it sounds too good to be true, it is too good to be true. There is no magic. Where there is money, there is deceit and opportunistic theft. Don't believe anyone who tells you they will do a job without staging and proof. Unless you bought those venture-backed rose-tinted glasses for those passionate about whatever the next fad is. Open your eyes, people... Oh and this just reeks of con.